Alibaba's International Ambition Circles Back To Chinese Consumers

Chinese e-commerce giant
Alibaba might be marching overseas with the $1 billion investment in Singapore e-commerce start-up Lazada, but the group still needs to count on Chinese consumers to fulfill its international ambition.

Alibaba founder Jack Ma in 2015 said the company wants to generate 50% of its revenue from international operations in a decade. But progress has been slow- international retail and wholesale business accounted for just 6% of its revenue in the December quarter, down from 8.3% in the previous quarter and 8.5% in fiscal year 2015.

The company yesterday announced its foray into Southeast Asia. It spent $1 billion for a controlling stake in Lazada, which have operations in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. The deal, which values Lazada at $1.5 billion, or about ten times of its net revenues in 2014, gives Alibaba an inexpensive access to the region, says HSBC analyst Chi Tsang.

But whatever boost Alibaba can get from Lazada will be limited. Although the company has good progress in some countries such as Indonesia, the overall market it competes in is small and fragmented. Online retail, worth $7 billion in the six countries, accounted for less than 1% of retail sales in the five ASEAN countries excluding Singapore, according to management consulting firm A.T.Kearney. In Singapore, the number stands around 4% compared with 8% in China. Alibaba’s revenue in fiscal year 2015 was a whopping $12.3 billion, dwarfing the entire e-commerce market in the region. It will take the company a long time before generating meaningful returns as it must invest in logistics and digital payment infrastructure first, according to market research firm Forrester analyst Wang Xiaofeng.

“To get 50% of their revenue internationally they are going to do what they did in China in the rest of the world. But where do you find opportunities that big?” says Jeffrey Towson, a professor of investment at Peking University’s Guanghua School of Management.

The answer goes back to China, but with a twist. Although the country’s e-commerce market is getting saturated, Alibaba has found a sweet spot in cross-border e-commerce. The group is marketing itself as a gateway to China, where it helps foreign brands sell directly to Chinese consumers in a market worth more than 900 billion yuan last year, estimates consultancy iResearch. It has beefed up its Tmall online shopping mall with so-called “country pavilions,” which offers popular products from countries including Australia, France, the U.S. and South Korea. Foreign brands including Costco and Macy’s have signed onto Tmall.

Alibaba enjoys unparalleled advantage in cross-border e-commerce, although a number of well-funded players are stepping up competition, Forrester's Wang says. Its top rival Tencent last month led an investment round of more than $100 million in e-commerce start-up Little Red Book, which offers review and sale of popular cosmetics and food. But the likes of the Little Red Book will remain niche players as Alibaba’s scale dwarfs them all, they say. Plus, the group could offer valuable marketing opportunities to foreign brands with its stakes in media companies including China’s
Twitter equivalent Sina Weibo, video-streaming site Youku Tudou and English-language newspaper the South China Morning Post, HSBC’s Tsang says. The middle class’s thirst for foreign products will make the 50% goal attainable, Wang says.

Staying away from Chinese consumers is a peril Alibaba must avoid, Towson says. Alibaba last year sold its U.S. e-commerce site 11main in less than a year. Sales figure was never disclosed, but a number of reports have pointed to lackluster results as it faced difficult competition from Amazon. Southeast Asia will be easier because the region currently has no dominant player, but Alibaba must remember that the No.1, No.2 and No.3 advantages it has is always its large pool of Chinese shoppers, he says.